FIN722 Corporate Finance Assignment 1 2016

Learning Objectives:

After attempting this assignment, students will be able to understand the method of calculating opportunity cost of capital, net cash flows, analysis and decision of acceptance or rejection of proposed project by applying capital budgeting techniques..

Case:

Beverages Limited is considering expansion of its business operations because of rise in demand of its beverage products. A new plant has been decided to install by the company that costs Rs. 1,650,000. Moreover, net working capital at start of project is Rs. 475,000. This investment in networking capital will be recovered at the end of useful life of plant which is estimated to be 5 years. Plant’s salvage value is estimated to be Rs. 325,000.

Following are the Pre-tax cash inflows which are expected to be generated at end of each year by this new installation:

Cash Inflows Rs. 525,000 Rs. 610,000 Rs. 675,000 Rs. 725,000 Rs. 800,000

Depreciation method adopted by company is straight line. Moreover, company’s targeted debt to equity ratio is 40:60 with cost of equity 14% and before tax cost of debt 12%. Company falls in tax bracket of 35%.

Required: Based upon above provided information, you are required to:

1. Calculate Weighted Average Cost of Capital (WACC).
2. Calculate Net Present Value (NPV) of the project.
3. Calculate Internal Rate of Return (IRR) by using interpolation formula.
4. Analyze whether the project is feasible to undertake. Provide conceptual rationale in support of
   your answer.

FIN722 Assignment 1 2016 Solution